The Channels of International Business-Cycle Transmission to Highly Globalized German Regions

The phenomenon of international business-cycle transmission has for a time played a predominant role in explaining volatilities in the domestic economy. Moreover, in the current economic crisis the topic of international contagion has gained new momentum. It is well known that business-cycle transmissions work through different types of channels. However, little is known about the intensity and the direction of these effects. Therefore, we deliver evidence on the importance, the direction and the timing of these effects using adequate qualitative as well as econometric methods.

Among the most important channels are the interest rate and the trade channel. More recently, also the importance of co-movements of international financial markets, consumer confidence and business sentiments have been highlighted as possible paths for business-cycle transmission. A special focus has been put on shocks to large firms through trade and international capital links. Unfortunately, the existing empirical evidence is rather limited. Despite some first evidence at the country-level, to the best of our knowledge, no evidence has been gathered with respect to the importance of these effects at the regional level. Highly developed and globally integrated economic regions in Europe may show higher degrees of dependencies than countries, where heterogeneity often cancels out in the aggregate. The study on the regional economy of Baden-Württemberg will serve as a role model in our analysis.